ECB stimulus speculation sends stocks soaring, euro skidding

[LONDON] European stocks pushed higher Friday on fresh signals the ECB will launch a bond-buying stimulus programme next week, while the euro crashed below US$1.15 (S$1.52) for the first time in more than 11 years.

Frankfurt's DAX 30 rose 1.35 per cent to a record close of 10,1677 points and hit an intra session record high of 10,207.97, while the CAC 40 in Paris gained 1.31 per cent to 4,379.62.

London's benchmark FTSE 100 index rose 0.79 per cent to 6,550.27 points.

Meanwhile Switerzerland's SMI tumbled 5.96 per cent, still reeling from the Swiss National Bank (SNB) abruptly ending Thursday its policy to hold down the value of the franc, which saw the currency soar.

The SNB came under fire Friday for its surprise withdrawal of the floor of 1.20 francs to the euro, as the sharp rise of the currency threatens causing a slump in the export-dependent economy and has bankrupted several foreign exchange broker firms worldwide.

A brokerage in Britain and another in New Zealand declared insolvency Friday as they were caught out by the swift rise in the franc, while the shares of a US brokerage were suspended.

On Thursday, the Swiss unit had rapidly strengthened 30 per cent to 0.8517 before ending the day at 1.0035, a gain of around 15 per cent.

The franc stabilised around parity with the euro, trading at 0.9818 Swiss francs to the euro late on Friday.

The SNB had been defending the exchange rate floor since September 2011 in an effort to protect the country's vital export and tourism industries, even buying massive quantities of foreign currencies to do so.

The rate was introduced as the eurozone crisis sent investors flocking to the haven currency. More recently, the Russian ruble crisis put renewed pressure on the franc. But the bank said Thursday it was no longer needed.

Focus was also firmly on the European Central Bank, which will decide on the scale of a planned sovereign debt purchase at next week's meeting, a board member said Friday, in the clearest sign yet that the ECB will launch the controversial stimulus measure.

"We will take the American and British experiences into account in order to determine the amount of debt to buy so as to reestablish confidence and bring inflation back to a level close to and lower than 2.0 per cent," Benoit Coeure told the French newspaper Liberation.

It comes as official data on Friday revealed that inflation in Germany, Europe's biggest economy, slowed to just 0.2 per cent in December, its lowest level in more than five years, and averaged 0.9 per cent for the whole of 2014.

The chronically low level of inflation across the single currency bloc has fuelled concern the region could slip into deflation - a sustained and widespread drop in prices. Britain too risks falling into deflation later this year.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Such concerns have fuelled speculation that the ECB could launch a programme of sovereign bond purchases known as quantitative easing or QE when it holds its first policy meeting of the year next Thursday.

The Swiss central bank's decision to abandon the currency cap "is a major move and has several consequences not least of which is to inject a fresh deflationary shock into the system", noted Neil MacKinnon, economist at VTB Capital financial group.

"Now the markets expect the ECB to announce QE at next week's meeting. If they don't the markets will understandably be very disappointed and this will just create fresh volatility and downward pressure on the major equity markets."

The single European currency weakened on the increasing certainty of an ECB bond buying programme, which would flood the economy with euros, crashing below US$1.15 for the first time in more than 11 years.

It struck US$1.1460 in afternoon trading, its lowest point since mid-November 2003. It later recovered to US$1.1527, still down sharply from US$1.1623 late on Thursday.

Eurozone government bond yields also pushed lower, some touching record lows in anticipation the ECB would soon enter the market.

French 10-year bonds hit a record low of 0.613 percent during the session and Italian 10-year bonds set a new record low at 1.658 per cent.

US stocks pushed upwards, with the Dow Jones Industrial Average rising 0.16 per cent to stand at 17,347.94 points in midday trading.

The broad-based S&P 500 climbed 0.51 per cent to 2,002.78, while the tech-rich Nasdaq Composite Index gained 0.41 per cent to 4,589.43.

AFP